Jumping Into DeFi: My First DeFi experiment Part 1

Pescara Many of you know I found my way to Bitcoin way back in 2014 when I was looking for more p2p lending options. And I found them in the form of BTCJam (RIP), Loanbase (RIP), and Bitbond, which still exists and has a niche lending to e-commerce companies. They were the first generation of Bitcoin lending companies.

My Thoughts on DeFi and Crypto Lending 2.0

http://jubainthemaking.com/gumbo-sherikat/ But until now, I haven’t been comfortable trying my hand at DeFi, or decentralized finance. DeFi is where many lending tools, platforms, and tokens are accessible in a decentralized and trustless way just by connecting your wallet and investing.

http://joshuaweir.com/2019 Compound is one of the biggest DeFi apps on Ethereum, the biggest DeFi platform. Compound currently has over $4 billion worth of borrowing happening on its platform and it’s not even the largest borrowing app on Ethereum.

So why wait until now? 2 reasons.

  1. I was burned before by lending too early on platforms and lost some coins. These coins now would be extremely valuable so it made me wary. I wanted to wait for some of the first bugs to be worked out.
  2. I don’t like using Ethereum. ETH the coin might be successful and it’s brushing up on all time highs like Bitcoin is, but the platform is not user friendly or easy to use and it’s expensive. Gas fees for a DeFi transaction are often more than a bank wire transfer fee. Maybe when the conversion to ETH 2.0 that’s entirely Proof of Stake happens, these fees will go down but I don’t enjoy using it

What changed is the discovery of an Ethereum sidechain (a chain that allows you to swap or link assets across multiple blockchains) that is faster and cheaper. But it isn’t decentralized.

It’s the Binance Smart Chain (BSC) started by CZ, the founder of the Binance exchange. BSC is more centralized than I prefer in a blockchain and it runs on a variation of Proof of Stake called POSA or proof of staked authority. Currently there are 21 stakers/validators for BSC. 

If tokens want to ONLY be on the BSC, then they will be BEP2 tokens. This is a token standard like Ethereum’s popular ERC-20 standard. The most popular BEP2 token so far is BTCB or the BEP2 version of Wrapped Bitcoin. BTCB is fully backed by Bitcoin and since the reserve addresses are public anyone can audit it at anytime to see that the Bitcoin that claims to back the BTCB tokens are there.

If tokens want to be able to move back and forth between BSC and Ethereum, then they will use the BEP20 specifications. BEP20 is compatible with Ethereum’s popular ERC-20 tokens. BNB, the token for the Binance exchange and the BSC is ERC-20 compatible. And I like this that I can move them back and forth if I want to.

I see the BSC sidechain as a powerful way to take advantage of Ethereum’s community without the clunkiness of Ethereum’s network.

So now onto the experiment with DeFi and next generation Crypto lending.

The Tools of the Trade

First, let’s go over the tools we need to make this happen

Tool #1: The Wallet

While most wallets support ERC-20 tokens if you can store Ethereum on them, that’s Tiznit NOT true of the Binance Smart Chain (BSC). One of the most popular Binance wallets is Trustwallet. Here’s a pic of what the Trustwallet looks like on your phone as it’s a mobile wallet.

Tool #2: The Coins

Bitcoin is not compatible with either ETH or BSC so you have to convert it into either:

  • Wrapped BTC (WBTC) for Ethereum OR
  • BTCB Bitcoin for the Binance Chain

to transact with it on either of these chains.

Or you can use one of many crypto to crypto exchanges to exchange Bitcoin for Ethereum or BNB or another ERC-20 compatible token.

Tool #3: The Lending Platform

the front page of Pancake Swap

In this case, I’m going to go with the largest AMM (automated market maker) on the BSC, Pancake Swap. You can do 3 important things on Pancake Swap among other things and those things are:

  1. Put your money into a liquidity pool to earn interest
  2. Yield Farm where you select your investment directly
  3. Exchange BSC tokens for one another (and some ERC-20 tokens too)

For the liquidity pools, you get paid in a BSC compatible token with the most popular here being their CAKE token.

For the yield farm, you pick which token you lend with you earning an APR in the native CAKE token

As you can see, most of the interest rates are high based on the risk you are taking on repayment AND on the value of the CAKE token. By the way, these listings like CAKE-BNB LP means the liquidity you are adding is 50% CAKE and 50% BNB. Don’t let that confuse you and get in the way of your loan. It took me a couple of tries to realize this I have to admit so just letting you know in advance.

The DeFi Experiment Begins

I took a combination of some USDC and USDT that I had as ERC-20 tokens and a little Bitcoin and converted them to BNB. So I am starting with $500 worth of BNB, currently valued at $257.94. My goal is to earn $100 in the next 30 days using Pancake Swap. That’s a 20% return (100/500) or 240% APR so it’s pretty ambitious. Let’s see how we do. BNB is step 1.

Step 2: Converting BNB to BNB on the BSC Smart Chain. Trustwallet has a swap function so this was pretty easy once I was able to find it. You must move it over to the Binance Smart Chain as this is the blockchain where PancakeSwap operates. The exchange BNB token has a yellow logo while the BNB for BSC has a black logo with the same diamond and dots logo design for both. Make sure you are using the right one. You can tell which is which by looking at the wallet addresses. The one starting with 0x like all ETH addresses is the exchange token and the one starting with bnb like bnb1xwe23 is the Smart Chain token. DO NOT confuse these or you will lose coins.

Now for Step 3, connecting the wallet. Trustwallet is highly recommended if you don’t already have a DeFi wallet and intend to use the BSC. Trustwallet gives you the chance within the wallet to connect to DeFi through the DApps icon at the bottom, 2nd from the left.

When I click that, I look for Pancake Swap.

Then Click on Connect (upper right) and you see options that include Trustwallet itself as well as popular ETH DeFi wallets like Metamask and the WalletConnect feature. You can connect now or go to the Yield Farms, which is what I’m doing. I’ve decided on a 60/40 strategy and the 40 is to farm CAKE directly.

So that takes care of CAKE-BNB.

My 2nd choice for the 60 is SWINGBY. I chose SWINGBY based on the attractive returns available but not wanting to take the highest risk with the highest APR. This one was in the middle.

Now to Unlock the Wallets. CAKE first. When your wallet connects you have to approve the contract. After doing so, your CAKE-BNB liquidity will show in the box like this. Confirm the supply.

Now we wait but we have one last important piece after we go through the same process on SWINGBY. That one looks like this now that I’ve approved the contract

Now let’s look at the prices of the important tokens in this trade.

  • BNB and BNB Smart Chain are at $257.94
  • CAKE is at $11.37
  • SWINGBY is at 71c

These prices will affect our interest rates. Why?  Because at the end of the 30 days I will take the CAKE and SWINGBY tokens and swap them back out for BNB, which is a higher grade, more liquid token to calculate my final returns.

Ideally, you want to stake a token (like CAKE here) that you would not mind holding. However, one of the reasons these tokens pay more is because they are not very liquid and need the liquidity that we provide. So for my money, it’s less risky to swap it back out for BNB. Your mileage may vary.

Update #1

I started a week ago on February 25th and here is my current stake.

  • .344 of CAKE from CAKE-BNB
  • .656 of CAKE from SWINGBY-BNB 
Total CAKE Tokens Earned So Far in my Trustwallet on my phone

My total CAKE is 1.0 as of today.

The current prices are:

  • BNB: $251.10
  • CAKE: $12.92
  • SWINGBY: 74c

So my total interest earned is $12.92 or the price of 1 CAKE or 2.5% this week. Good stuff but below my goal of earning $100 in 30 days.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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